Roughly 14 months after PaineWebber Inc. combined its municipal functions into one unit reporting to the dominant retail side of the house, top executives say the change has resulted in more municipal business for the firm.
"Overall sales in municipal products in the retail system were up in 1996, even though the new-issue volume was down (from 1993) and I expect it's going to be higher again in 1997," said Terry L. Atkinson, managing director and head of the firm's municipal group.
The firm previously operated two separate muni divisions, one for retail customers and another for institutional and banking clients.
Prior to the consolidation, Atkinson reported to both the capital markets and retail sides. The change to one unit has smoothed the flow of tax-exempt product to PaineWebber's 6,024-branch retail distribution network, Atkinson said, helping to make last year a record one for the municipal group at the firm.
While exact figures for 1996 will not be available until PaineWebber issues its annual report next month, Atkinson anticipates total municipal revenue for 1996 to be up "10% to 15%" from 1995's total, which according to PaineWebber's 1995 annual report, came in at $232.01 million.
And municipal revenues for 1995 were up a significant 30% from 1993, Atkinson noted. In 1993, a benchmark stellar year for the municipal bond industry, the firm posted $181.44 million in municipal revenues.
And despite a sharp fall-off in new bonds entering the municipal arena last year, compared to 1993, PaineWebber was responsible for underwriting more senior managed negotiated new issues in 1996 than three years ago, according to Securities Data Co.
The firm is lingering near the top of the senior managed underwriting rankings and last year came in third nationwide in the negotiated tables, running the books on $13.38 billion out of a total of $183 billion in new bonds in the market. Among senior managers on all deals, including competitive underwriting, PaineWebber ranked fourth nationwide.
That's up from seventh position in 1993, when the firm was senior underwriter on $12.12 billion of negotiated product in what was then a larger pie, with $292 billion of new bonds entering the market that year. Across the board, including competitive offerings, PaineWebber ranked eighth nationwide in 1993.
And so far this year, PaineWebber is clinching the top slot in negotiated underwriting nationwide with $3.40 billion of bonds under its belt. That dominance in the negotiated sector has so far helped the firm hold on to the overall top spot position in the rankings, including competitive underwritings. The firm has run the books on $4.09 billion in deals in both competitive and negotiated underwriting so far in 1997.
Here to Stay
Atkinson attributes the firm's success in municipals to its commitment to the business.
"If you're going to be in this business there's got to be a strategic need, there's got to be some constituency in your firm that says we have to be there," said Atkinson. And PaineWebber's constituency is clearly retail.
Also crucial when measuring commitment to a business, is whether the municipal bond department can "consistently" be profitable, noted Atkinson.
"Can you meet whatever test, whether it's profit margin (or) return on equity that your firm (requires?)" If the answer is yes, a firm can stay in the business, he said.
But what if the answer to the strategic question is no?
"Then you're going to be Salomon or First Boston or DLJ or Chemical Bank or every single money center bank that 10 years ago was in the business, almost all of them gone," said Atkinson.
"(Retail) is the driver in this business, almost 75% of all municipals are purchased by individuals either directly or be it a proxy through mutual funds or trust departments," said William J. Jester, a managing director who heads up the municipal bond department.
Jester, who formerly ran Chemical's municipal department, has experienced first-hand what happens when a firm decides that its strategy no longer includes municipals. Chemical left the business in the first quarter of 1996, following its acquisition by Chase Manhattan Bank.
Feeding the 'Driver'
At PaineWebber, where he has hung his hat for almost a year now, the consolidation of both the retail and institutional municipal efforts has helped the firm facilitate a more effortless flow of bonds to that "driver," or retail system, according to Jester.
As an example, he pointed to the ability of the institutional desk's ability to locate bonds among its customer base for the firm's retail system last July, when there was a dearth of new issues in the market.
PaineWebber purchased securities from institutions who were restructuring their portfolios, in an attempt to get out of higher-coupon securities and get into more aggressive discount coupons, said Jester. The firm was thus able to pick up some bonds that retail investors were willing to buy, he noted.
"It was a perfect supply channel for our retail distribution effort, and prior to this union of the two groups, I don't think that some of those advantages would have been had," Jester said.
"I don't think it's right to separate these two businesses, certainly the way it was here at PaineWebber before, where you have two separate businesses reporting to two different parts of the firm," he added. Atkinson now reports directly to Mark B. Sutton, head of PaineWebber's private client group.
And to maintain enough product to feed that retail system, PaineWebber has made a conscious decision to remain a Wall Street shop with a presence in the regions, unlike some of its competitors.
"If you look around where I have my regional centers (with) both banking and committing centers, some of the places I'm at no one else is there, or very few are there," said Atkinson.
The only other Wall Street firm that still has a similar, but smaller, presence to PaineWebber in the regions is Smith Barney Inc., according to Atkinson.
"We have the same capabilities as a Raymond James( & Associates Inc.) has in Florida, a Stone & Youngberg out on the West Coast, in trading, underwriting and sales presence, in addition to a banking presence," Jester said.
"And that's one of the reasons why Terry's strategy works well, because we have stayed in the regions while others have pulled back," he added.
A Wide Regional Presence
Commenting on the decision by some of his competitors to shutter some of their regional presences, Atkinson noted: "It might be strategic, but it also might be less painful to cut people that you don't see every day."
For its part, PaineWebber has public finance banking and commitment capabilities in Boston, Philadelphia, and Orlando, despite the fact that some of its competitors have scaled back in those cities, noted Atkinson.
The firm has also maintained a municipal presence in the Southwest and West.
In Texas, PaineWebber has its bond department in Dallas and its banking capability in Houston.
"As other people abandoned (Texas) I had to restaff it myself and I think that our market share has picked up dramatically over the last two years," he added.
In 1996, PaineWebber ran the books on $752.9 million of all bonds which entered the state that year, coming in sixth place.
But year-to-date it's a different story, and the firm is claiming the top slot in the state, with $387.4 under management.
In California, PaineWebber has a commitment and banking center in Los Angeles and San Francisco, and has the same capabilities in Seattle, Wash. The firm also has an public finance office in Puerto Rico.
And the firm has recently moved to bolster its presence in Los Angeles with the hires of Anthony H. Fisher and Jeffrey D. Bower, two senior bankers from Merrill's office there. PaineWebber also recently rehired Derek McGreal in San Francisco. McGreal, who will cover housing for the firm, had worked with PaineWebber several years ago.
For their part, Fisher and Bower will cover utility and general government clients in California and the surrounding states.
But the department's hiring has been "incremental," cautioned Atkinson. "As the business has grown, the staffing has reflected that business," he said.
Fisher and Bower will help PaineWebber grow what is already a "very dominant" business in California, noted Atkinson.
So far this year, the firm is ranked number one in California, with $1.31 billion in both negotiated and competitive deals in the state. In 1996, PaineWebber came in fourth in California in the senior manager rankings. That ranking saw the firm underwrite $2.52 billion in negotiated and competitive offerings, capturing 10.2% of the market in the state.
And in New York, noted Atkinson: "Frank Mahoney, who we hired here from the Empire State Development Corp., will help us establish a very dominant practice in New York," he added.
Last year PaineWebber did $2.65 billion of all the bond business in New York, finishing second. However, so far this year, the firm is only in seventh place, with $229.1 million of bonds senior managed.
"We have tried to be opportunistic, we look at the business and say, where is it that we can fill in, " said James W. Ziglar, a managing director and head of the firm's Washington office.
"When you look at where the regional dealers happen to be, they happen to be in California, it's a high-tax state, there's a lot of wealth there and there's a lot of issuance out of that state," said Ziglar.
And, noted Ziglar, it's the same thing in Texas and Florida.
"(Even though) Florida is not a high-tax state most of its residents came from places where they had high taxes," Ziglar added. " "That's why it's important to be in those centers," he noted.
Commenting on the recent hires on the West Coast, Ziglar said: "I think you'll see an uptick in our approach out in California and our success rate."
But cautioned Atkinson: "I'm not everywhere, I'm not covering 50 states.
"We want to be a major factor in all areas we choose to serve (whether regional or sector specific)," he added.
In specialty areas, the firm is active in health care, housing, student loans, transportation, water and sewer and overall education, he noted.
PaineWebber's willingness to make a regional commitment should then ensure it a position in what Atkinson has predicted will be a group of roughly seven firms controlling the same municipal market share currently held by ten players.
He believes that 65% to 75% of the overall business will be in the hands of seven or eight firms two years down the road, compared to 65% of the market currently held by the top ten. "Maybe the percentage will be slightly off but that will happen," he added.
"The trick is do you want to be in that top seven or do you want to play a niche or a region?" Atkinson asked. PaineWebber wants to be in the top seven, he noted. He declined to predict who the losers will be.
However he does provide a hint: to be in the top seven firms are going to have to maintain enough staff to have a nationwide full-service practice, he noted.
And Atkinson noted that he does not see an immediate threat to PaineWebber's muni market share from the proposed merger of one of those top 10 firms, investment bank Morgan Stanley Inc. with retail giant Dean Witter Reynolds Inc.
"You take (Morgan Stanley) that has about 3% in market share and you team it up with a firm that went out of the (public finance) business two years ago," noted Atkinson.
" So (you have) a retail firm that made a conscious decision, 'we don't need new issue product' and the brokers weren't crying for it because they would have got back into it (if they were), so you take 3% or so, plus 0%, all you have is two firms with about three percent," he added.
"So in my mind as a competitor it doesn't impact me at all," Atkinson said.
However, noted Atkinson, the combined entity might be able to say that there's more of a strategic reason to get involved in municipals in the future, and they could advertise themselves to issuers as a more balanced distribution network. But that remains to be seen, he added.
But whether there are seven firms or ten firms controlling the lion's share of the muni market, they will still have to wade through a market that has been hit with major reform initiatives over the last three years.
Atkinson, who sits on the Municipal Securities Rulemaking Board, said he agrees with the recent calls by prominent public finance professionals for some leverage on the mandatory two-year ban applied to firms for violating the MSRB's Rule G-37.
Both Michael D. McCarthy, a partner at Goldman, Sachs & Co. and vice chairman of the PSA and James B.G. Hearty , a managing director at Lehman Brothers, have recently expressed a desire to change the punishment so it will fit the crime.
Rule G-37 generally bars municipal dealers who contribute to issuer officials from engaging in negotiated business with those issuers for two years afterward.
Both Hearty and McCarthy have noted that the across-the-board ban is too severe for minor infractions, such as inadvertent first- time offenses where firms discovered contributions, reported them and subsequently sought refunds.
"(But) we have such a short history of this (rule)," noted Atkinson. "I think it will evolve over time," he added.
And PaineWebber has triggered the two-year ban twice, once inadvertently, and on another occasion with knowledge.
The firm was forced to bar itself from doing negotiated business with Nashville-Davidson County Metro Government, Tenn., under Rule G-37 because of an inadvertent $50 contribution by a retail broker to a candidate running for the Nashville city council.
Under the same rule, the firm was also forced to ban itself from business with Madison County, Ill., after it allowed an employee with close ties to the county to contribute $500 to the county Treasurer's campaign for a seat in Congress.
Atkinson added: "G-37, G-38, we strongly support all those rules and I don't want to see any backsliding industry wide."
"Whether there's too much regulation or not, I think it's here and I think the industry, including PaineWebber, including Mike McCarthy's firm, just has to deal with it effectively."
Commenting on the yield burning controversy, Atkinson would only say: "It's an industry-wide issue, and various regulatory agencies are taking a look at it. I'm certainly not unaware of it but I'm not spending a lot of my time on it."
